Trouble in Paradise Valley--An Arizona Town's Parcel Tax Ignites Debate

Bloomberg BNA
Wednesday, May 14, 2014
Michael Kerman

An Arizona town ruffled feathers when it enacted a local ordinance raising a “parcel tax” based on property values to fund local fire services. Because the town bypassed the ordinary procedures required by state law to enact or raise a property tax, the Arizona Legislature was left to put out the fire.

The Legislature enacted H.B. 2378 on April 23, which provides that “except for a municipality that has, before December 31, 2013, adopted an ordinance requiring property owners to obtain fire prevention services,” and except as otherwise provided in the state’s tax code, municipalities may not levy a municipal-wide tax or fee against property owners based on the property’s size or value. Despite containing only seven lines of amended text, the bill caused considerable confusion.

The legislative summary on the Arizona Legislature’s website suggests that the bill prohibits municipalities from levying any property taxes that are used to fund public services. Arizona has not levied a state-level property tax since 1996. Thus, no state property tax and no municipal property tax suggests that no property tax revenue is going toward funding of public municipal services.

However, the Arizona Tax Research Association (ATRA), a taxpayer watchdog organization, explained in its position paper supporting the bill that the legislation arose after the town of Paradise Valley, a suburb of Phoenix in Maricopa County, passed a local ordinance authorizing a parcel tax to pay for local fire services. The ordinance was passed after the town unsuccessfully sought state legislation that would have allowed all cities and towns to levy a new tax on property for such services, according to ATRA, which called the ordinance “bad precedent.”

House Bill 2378 ensures that cities and towns use the state’s existing property tax provisions to raise revenue and that property taxes are levied consistently throughout the state. In other words, the town has to prepare a full statement of its financial affairs, estimate the amount of property tax revenue needed to meet the town’s anticipated expenses for the upcoming year, give public notice of the expected tax rate and hold public hearings. Property tax levies may not increase by more than 2 percent over the prior year without a public vote.

By enacting its separate parcel tax, Paradise Valley raised additional property tax revenue without following these state-mandated procedures.

November 2013 minutes from a Paradise Valley town council meeting highlights the town’s “fundamental disagreement” with ATRA. “The best course of action to keep the fee is to educate ATRA and its supporters in the legislature that Paradise Valley has a unique solution to a unique problem that has proven to be successful and acceptable to the residents,” the minutes state.

While the Arizona Legislature ultimately sided with ATRA, passing H.B. 2378 by a unanimous 55-0 vote, the bill’s language regarding a municipality that passed an ordinance before December 31, 2013, effectively grandfathers in Paradise Valley’s parcel tax.